Inflationary pressures behind used car values won’t end any time soon

The latest vehicle production figures from the Society of Motor Manufacturers and Traders (SMMT) are a timely reminder that the inflationary pressures on used car values aren’t going to end anytime soon.

UK car production fell to its lowest level in 65 years last year as the global shortage of semiconductor chips and production disruption took its toll.

In 2021, Britain’s car assembly plants produced only 859,000 vehicles, down 6% on the 920,000 produced in the first year of the pandemic in 2020. UK factories are producing a third fewer cars than in 2019 and around half the numbers of the most recent high in 2017. In the words of SMMT chief executive Mike Hawes – deeply depressing.

The global picture is better - but only just - as OEMs wrestle supply shortages and changing consumer demand for electrified vehicles. Figures from the VDA, which represents German manufacturers, shows that car production in September last year was 208,700. In September 2019 it was over 400,000.

The downturn in new stock has clearly buoyed the used car market and, in my 30+ year career in motor finance, I have never seen such upwards pressure for second-hand vehicles as I did last year.

The latest SMMT numbers show just shy of six million used cars were purchased by the end of November last year, up 16% on 2020 numbers but still way below the pre-pandemic level.

However, consumer demand was significantly higher than pre-pandemic levels, and remains so. Traffic to Auto Trader websites was up 27% last year compared to 2019 numbers and, as a result, values have surged.

Auto Trader figures show that that used car prices rose by 30.5% on a year-on-year basis in December, reaching an average of £17,816. That marked the 21st consecutive month of growth. That level of growth is clearly unsustainable and, due to new legislation preventing forecourts selling new vehicles above the manufacturer’s recommended selling price, the gap between the price of a new and used model has narrowed.

Whilst there will be a tempering of price growth, inflationary pressure will remain. Fewer new cars on the road today means a more constrained used vehicle market in three to four years’ time when the PCP agreement comes to an end.

The SMMT forecasts that production in the UK will rise above one million again this year and remain above that level. The UK is trying to transition to a world leader in the production of electric vehicles and that could give the sector a needed boost in years to come.

But when it comes to customer choice on the forecourts or online, options will continue to remain more limited than they were two to three years ago for some time to come.

And, when combined with unfettered consumer demand, that can only create a platform for further used vehicle price inflation.